US Airlines Face Challenges as Domestic Airfares Continue to Decline

Airline stocks are facing a hit as US travelers opt to fly to Europe instead of taking domestic vacations. According to federal data, airfares across the industry dropped by 13.3% in August compared to the previous year, marking the fifth consecutive month of decline. This trend comes at a time when airlines are grappling with rising fuel prices and increasing labor costs.

The stock prices of airlines that primarily focus on domestic flights have taken a downturn due to concerns about their ability to raise fares to offset these mounting expenses. The US Global Jets exchange-traded fund, which tracks the industry, has experienced a 19% decrease from its July peak, even though it has gained 5.4% this year following the post-pandemic recovery. American Airlines has seen a 29% decline in its stock price, while Southwest Airlines is down 24%.

In contrast, the S&P 500 has seen a 1.5% increase over the same period. Andrew Didora, a senior airlines analyst at Bank of America, notes that investors are worried about the lack of pricing power as fuel costs rise. The industry has been through a turbulent phase, with airline stocks plummeting due to the Covid-19 pandemic’s impact on travel. Carriers had to rely on government aid and borrow billions of dollars to weather the storm.

As travel restrictions eased and people sought to use their saved-up finances for vacations, airfares soared by as much as 43% in 2022 compared to the previous year. Major carriers enjoyed record revenues, and their shares rebounded from the 2020 lows, although debt levels have prevented them from reaching pre-pandemic levels.

Although there is still a high demand for air travel, there has been a shift in destinations. Spirit Airlines, which primarily operates domestic flights, recently had to offer significant discounts for travel booked from late summer to the pre-Thanksgiving period. This has led to a lower revenue forecast for the third quarter. Similarly, Southwest Airlines reported healthy overall demand but lower-than-expected August bookings.

Investors are concerned that the surge in leisure travel during the post-pandemic period will eventually decrease, and corporate travel may not fully recover. Business travelers accounted for around 50% of profits and 12% of traffic for US airlines before the pandemic. Additionally, American Airlines, Delta Air Lines, United Airlines, and Alaska Air Group have all warned of higher costs for the third quarter.

Fuel prices have increased by approximately 25% since July, and labor costs are expected to rise due to new contracts. American Airlines and Delta pilots will receive pay raises of 46% and 34%, respectively, over a four-year period. While there is a possibility of passing on these higher costs to customers through increased fares, it remains uncertain whether travelers will be willing to spend the same amount on trips as their pandemic-induced wanderlust diminishes.

– Federal data
– Andrew Didora, senior airlines analyst at Bank of America
– Charley Grant, The Wall Street Journal